Megan McArdle has a nice post here about the looming disaster in public pensions. I hate to blow my own horn (ok, I love to blow my horn, that's why I friggin blog!) but I posted on this last year here. It's linked to the broader problem of state and local government deficits and spending which I've mentioned in a couple of posts here and here.
As she notes, these programs were underfunded and the politicians turned to a lot of exotic forms of investment in the past few years.............you guessed it, they were betting on interest rate swaps and other stuff that's now crashed and burned. At least, unlike private investors, they can start threatening people with criminal action like this piece about the state of Tennessee that allowed ONE FINANCIAL SERVICES FIRM to both advise towns on these investments and then sell them at the same time. That was smart. Unsurprisingly all these towns are now in trouble.
The latest example of this that I came across was this gem in Indiana where the water utility lost 100 million bucks on a variable rate financing deal.
If smart people on Wall Street did not understand these things, how in the hell can we expect policy folks and politicians, some of whom were part-time in places like Tennessee, understand interest rate swaps? This is going to be crazy expensive.